5 Simple Rules to Win at Day Trading

06/25/2016 09:53 am ETUpdated
Jun 25, 2017

The usual response from most people, who find out that you are a Day trader is not one of admiration or respect as they assume that Day traders can only make money trading the financial markets, working at big investment bank with a seven figure trading account. However, this couldn't be further from the truth, trading is similar to most professions it requires discipline and importantly control over your emotions. It takes time to master both these skills, however, you're more likely to win at Day trading by following these 5 simple rules:

1) Always have a reason to put on a trade

This is probably one of the most important rules to win at Day trading, yet many newbie traders strive to play out the role of the 'Hollywood trader', who shoots from the hip, making millions of dollars within a few seconds which is often followed by an expletive or two! Sure, traders who have access to large amounts of capital, access to great investment research and a broker offering generous levels of leverage are able to make millions in seconds. However, to be successful at Day trading you need to do homework and weigh up the pros and cons of initiating a trading position.

2) Always have a precise idea of where your stop loss is going to be

This is Part 1 of your exit strategy, you need to know what the maximum you are prepared to lose is before you initiate a trade, whether you use technical analysis to identify your stop loss or whether it's based of a dollar amount, it is imperative to know, when it is time to get out.
3) Never increase your stop loss

This is self-explanatory, yet it's a common mistake among Day traders, old and new, as they often get married to their trading positions, so attempt to salvage a losing a trade by increasing the amount they are willing to lose (the stop-loss) with the hope perhaps a little more room to manoeuvre would help turn a losing trade into a winning one.

4) Identify a profit target

This is part 2 of the exit strategy and despite the old adage of 'cut your losses and let your profits run', if you're able to identify your profit target before initiating a trade, you're likely to be more consistent in your trading approach and avoid the tempting prospect of exiting positions as soon as a trade is in a winning position.
5) Risk/Reward ratio for each trade should always favour the upside

The maximum you are prepared to lose on any positions should be less than that which you are expecting to gain.There aren't many traders, who can claim to have a near perfect trading record, roughly the win/loss ratio for the average trader is barely seldom above 50%. So, it's not difficult to understand that over the long-term if you initiate more losing trades than winning trades, then the rewards gained from winning trades should far outweigh the losses from your losing trades. As a famous investor once proclaim: "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."